Massachusetts Mortgage Loan Programs
Today, mortgage options are virtually endless, and often, confusing. We do business with a select group of highly knowledgeable and qualified mortgage professionals who can guide you through the mortgage maze. Please contact us if you need a referral to a great mortgage lender.
We have put together a summary of the most popular mortgage programs below.
30 Year Fixed-Rate Mortgage
This was once the gold standard of mortgages, paid off in 30 years. There’s a clear advantage to knowing what your payments will be and you can usually refinance if rates drop significantly. This is a long-term prospect; if intend to stay in your home for over 10 years, it’s a smartest and safest way to go, especially now with historically low mortgage rates. If you know you will be moving in 5 years or less, you may want to consider an adjustable rate mortgage.
For the remainder of 2010, the conforming loan limits will remain at $523,750 for single families and condos the Boston area. A loan over $523,750 is subject to Jumbo rates and terms.
The loan amount for a Jumbo loan is above Freddie Mac and Fannie Mae conforming guidelines of $523,750 in the Boston area for the remainder of 2010. When the market is very strong, jumbo loans can make a purchase possible; however they often come with higher down payments and higher interest rates.
Adjustable-Rate Mortgage (ARM)
This type of mortgage loan typically has an initial interest rate lower than a 30 year fixed, but is subject to changes in interest rate after a set period. There are 1 year, 3 year, 5 year, 7 year and even 10 year ARMs. The interest rate fluctuates with an indexed rate plus a set margin and the adjustment intervals are predetermined. Minimum and maximum rate caps limit the size of the adjustment. ARMs are popular with those who aren’t expecting to stay in a home for long, or in a hot market where houses appreciate quickly, or for those expecting to refinance. Typically, you can qualify for a higher loan amount with an ARM (due to the lower initial interest rate). Always assume that the rates will increase after the adjustment period on an ARM. You are betting that you’ll save enough initially to offset the future rate increase. Check the payments at the upper limit of your cap (your rate can increase by as much as 6 percent!), you can get burned if you can’t afford the highest possible rate.
Federal Housing Administration (FHA) Loan
This is a very popular government-subsidized loan program with low down payment (i.e., as little as 3.5% for those with qualifying credit scores) and closing fees included. A popular loan for first-time home buyers. FHA loans provide low rates for those who can’t come up with the down payment or have less-than-perfect credit. However, if you can afford 10% or more as a down payment, you might find better rates with conventional loans. Lenders are getting paid a 2 % service fee by the government, so your points should reflect a discount when compared to similar rate loans. There have been a number of recent changes to these types of loans; read more on those changes here.
United States Department of Agriculture (USDA) Loan
As FHA loans became mainstream, many believe it is the only alternative to the traditional Fannie/Freddie loan. However, a lesser known loan program from the USDA may be available in your area of Massachusetts and beyond. Known as the Guaranteed Rural Development Housing Section 502 Loans, these programs are designed for low to moderate income individuals or households purchasing a property in a “rural” community. The definition of rural can be quite surprising; here is an interactive map of the eligible Massachusetts communities.
There are many clear advantages to borrowers under these types of loans, including the benefits of no down-payments, no monthly mortgage insurance and unlimited seller contributions as well as the ability to repair certain aspects of the property and build in those costs into the total loan. With the upcoming FHA changes, the USDA loan requires less out of pocket, a lower guaranty fee and greater flexibility in managing the closing costs associated with the transaction. However, to be eligible to purchase a home with a Rural Housing loan, borrowers will need to earn a higher income to qualify for the same house with USDA than FHA. For more information about these loans visiting the USDA program page and see our blog post here.
1-yr. Treasury ARM
The rate is fixed for one year, after that the loan becomes adjustable every year. The new rate is determined by the treasury average index plus the loan margin (usually 2.25-2.5%). 30-yr. term. Since these have lower rates than a fixed mortgage, when rates go down, you benefit. Watch the margin, however, as it is added to the index to come up with a new rate after the adjustment period. When rates are going up, you could end up paying more interest than with a fixed.
With an intermediate or hybrid ARM, the rate is fixed for a period of time, then adjusts on a predetermined schedule. This is shown by the number of years the loan is fixed, and the adjustment interval. The new rate is determined by an economic index (usually treasury or treasury average index) plus the loan margin (usually 2.25-2.5%). 30-yr. term. When rates are going up, you could end up paying more interest than a fixed-rate mortgage after the initial period. If you aren’t planning to keep your house for long this might work for you as you will receive lower rates initially. Be sure to check the rate caps so you know exactly how high your payments can go. Fluctuating interest rates can mean higher payments over time.
Flexible Payment Option ARM
The borrower chooses from an assortment of payment methods every month. There is a “change cap” limiting how much payments can vary in a year. These can free up cash when you need it. Can be good for buyers with variable incomes (for instance salespeople who work on commission). But some options won’t even cover your interest so with lower payments, your balance will increase each month, and eventually your payments will increase substantially. This could lead to negative amortization. Eventually you will be required to pay down the principal and your payments will increase drastically. If you can’t make them, you lose the house. Many experts will tell you to stay away from these.
These work by allow you to pay only interest for a period of time without paying down the principal. If you don’t plan to stay in a home long, you can buy something you ordinarily couldn’t afford. If you are in a hot market, or a hot neighborhood, you’ll have low payments while your house appreciates in value. You can always pay more on the principal while enjoying the low payments. The day will come when you need to pay down the principal. If your home value has fallen, or your income decreased, two things very common in today’s economy, you could have trouble making the new payments. There’s no surprise many of these loans are now in trouble given the falling housing values and job market. Really, if you can’t pay interest and principal at the same time, chances are you can’t afford the house.
A Convertible ARM can be converted to fixed rate after a period of time. You will have a higher rate for the fixed with a convertible loan. You cannot look around for a better deal, which you can with a refinance. Saving the cost of the loan and the hassle of shopping loans are a plus, but you might be crying if the refinance rates are lower than your new fixed. Experts say, “Just refinance.”
Veteran Administration (VA) Loans
A zero-down loan offered to veterans only, the VA guarantees the loan for lenders. These are obtainable with nothing down and no mortgage insurance; also the loan is assumable. It’s possible for the rate to be more than conventional loans or FHA loans, so shop around first. Lenders are getting paid a 2 percent service fee by the government, so your points should reflect a discount when compared to similar rate loans.
A reverse mortgage is a loan given to older homeowners who need to borrow against the equity of their home while they are still living in it. The debt does not need to be repaid until the house changes hands. Interest is commonly one-year treasury rate, plus a margin and a cap on a rate change. The beauty of these mortgages is that they allow people 62 or older to stay in their homes as they age with no repayments. You must maintain your house, pay property tax, and insurance. Also you cannot take out a second mortgage, rent your home, or use it for business. The loans are complex, so make sure you understand what you are getting. AARP has good consumer-oriented explanations for seniors. We suggest choosing a lender who is member of the National Reverse Mortgage Lenders Association.